S.S. Rana
Commissioner,
Income Tax
(Departmental Representative)
Income Tax Appellate Tribunal
New Delhi
ssrana.irs@gmail.com

Sri Satender Singh Rana is an Indian Revenue Service (IRS) officer of 1994 Batch and is currently posted as Commissioner of Income Tax, ITAT, New Delhi. He has extensive experience in the field of Income Tax Litigation and judicial matters and is part of several committees formed by CBDT on Judicial/Litigation Matters.

Executive Summary

A large number of assessments pertaining to cash deposited in banks during demonetization period are pending. The article analysis relevant sections of I.T. Act as well as various legal issues to assist assessing officers in passing error free sustainable assessment orders.

Mission of Operation Clean Money (OCM) is to create a tax-compliant society through a fair, transparent and non-intrusive tax administration where every Indian takes pride in paying taxes. The strategy of Operation Clean Money is as follows:

  • Increase awareness about tax obligations using a comprehensive Information, Education and Communication (IEC) approach
  • Promote voluntary compliance by e-delivery of services and reducing taxpayer compliance costs
  • Collect timely and accurate third party information from reporting entities
  • Increase collaboration and data exchange with government agencies and data exchange partners
  • Effective identification, assessment and management of risks by leveraging technology and data analytics
  • Encourage timely and accurate reporting of income in returns and payment of taxes using customised communication and compliance monitoring
  • Transform verification and investigation function of the Department by leveraging analytical and collaborative technologies
  • Effective deterrence for habitual offenders to deter serious and repeated noncompliance
  • Develop strong partnerships with the tax professionals, industry associations and service providers to create a sustainable compliance environment
  • Evaluate feedback, events and results for continuous learning and improvement

For income tax purposes, ‘Operation Clean Money’ primarily stands for verification of cash deposits during demonetisation period. Further details regarding this operation are available at www.cleanmoney.gov.in

The Department has issued following Internal Guidelines for Assessing Officers:

1. Instruction No. 3 of 2017 dated 21.02.2017

2. Instruction No. 4 of 2017 dated 03.03.2017

3. SOP dated 15.11.2017

4. SOP dated 05.03.2019

5. Internal Guidance note dated 13.06.2019

In the case of cash deposits in a bank account, there is some confusion regarding the section under which addition should be made.

In this regard, Section 68 of I-T. Act is reproduced below:

“Cash Credits.

68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year:”

Section 69A of the I-T Act is reproduced below:

“Unexplained money, etc.

69A. Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such financial year.”

Books of account are defined in section 2(12A) of the I-T Act which is reproduced below:

(12A) ‘books or books of account’ includes ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as print-outs of data stored in a floppy, disc, tape or any other form of electro-magnetic data storage device;”

Section 44AA of the IT Act lays down provision regarding maintenance of accounts by certain persons carrying on profession or business.

In view of the above provisions, addition should be made u/s 68 of the I-T Act if:

1. the assessee is maintaining books of account, and

2. the amount is credited in these books of account

If the assessee is having business income and books of account are maintained, bank account constitutes books of account.

However, if the assessee is either:

1. not having business income, or

2. assessee is not maintaining books of account, or

3. disclosing income on presumptive basis without maintaining books of account, bank account does not constitute his books of account and addition should be made u/s 69A of the I-T Act.

In the case of CIT v Bhaichand N. Gandhi [1983] 141 ITR 67 (Bom.), it was held that the bank passbook could not be treated as books of account of the assessee. The court observed that ‘when moneys are deposited in a bank, the relationship that is constituted between the banker and the customer is one of debtor and creditor and not that of trustee and beneficiary. Applying this principle, the passbook supplied by the bank to its constituent is only a copy of the constituents account in the books maintained by the bank. It is not as if the passbook is maintained by the bank as the agent of the constituent nor can it be said that the passbook is maintained by the bank under the instructions of the constituent.’ It, accordingly, held that the bank passbook could not be regarded as a book maintained by the assessee.

From AY 2017-18 on wards, tax is payable u/s 115BBE of IT Act where addition has been made u/s section 68, section 69, section 69A, section 69B, section 69C or section 69D of IT Act. Section 115BBE is reproduced below:

‘Tax on income referred to in section 68 or section 69 or section 69A or section 69B or section 69C or section 69D.

115BBE.(1) Where the total income of an assessee,-

a. includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D and reflected in the return of income furnished under section 139; or

b. determined by the Assessing Officer includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, if such income is not covered under clause (a), the income-tax payable shall be the aggregate of—

i. the amount of income-tax calculated on the income referred to in clause (a) and clause (b), at the rate of sixty per cent; and

ii. the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (i).

(2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance [or set off of any loss] shall be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) [and clause (b)] of sub-section (1).”

In view of above provision, the assessment order must specifically contain direction for charging tax u/s 115BBE where such addition is made.

Assessment under which section.

Those cases where assessee did not voluntarily file return of income within the time prescribed u/s 139(1) of the I.T. Act, notices u/s 142(1) were issued for filing returns. In some cases, returns were not filed within the time prescribed in notice u/s 142(1) of the IT Act. In these cases, assessment is required to be made u/s 144(1) of I.T. Act which is reproduced below:

Best judgement assessment.

144. (1) If any person—

a. fails to make the return required under sub-section (1) of section 139 and has not made a return or a revised return under sub-section (4) or sub-section (5) of that section, or

b. fails to comply with all the terms of a notice issued under sub-section (1) of section 142 or fails to comply with a direction issued under sub-section (2A) of that section, or

c. having made a return, fails to comply with all the terms of a notice issued under subsection (2) of section 143,

the Assessing Officer, after taking into account all relevant material which the Assessing Officer has gathered, shall, after giving the assessee an opportunity of being heard, make the assessment of the total income or loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment:

Provided that such opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the assessment should not be completed to the best of his judgment:

Provided further that it shall not be necessary to give such opportunity in a case where a notice under sub-section (1) of section 142 has been issued prior to the making of an assessment under this section.

Order is required to be passed u/s 144(1) of I.T.Act even where the assessee has filed return of income, but after the due date prescribed in notice u/s 142(1) of I.T. Act.

Penalty is required to be levied under section 271AAC of the Income-Tax Act where addition has been made u/s section 68, section 69, section 69A, section 69B, section 69C or section 69D and tax is payable u/s 115BBE of the I-T Act.

Section 271AAC is reproduced below:

Penalty in respect of certain income.

271AAC. (1) The Assessing Officer may, notwithstanding anything contained in this Act other than the provisions of section 271AAB, direct that, in a case where the income determined includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D for any previous year, the assessee shall pay by way of penalty, in addition to tax payable under section 115BBE, a sum computed at the rate of ten per cent of the tax payable under clause (i) of sub-section (1) of section 115BBE:

Penalty u/s 271AAC may be initiated as follows:

Since income of the assessee determined includes income u/s 68 of I.T. Act, penalty proceedings u/s 271AAC are initiated separately.

Since income of the assessee determined includes income u/s 69A of I.T.Act, penalty proceedings u/s 271AAC are initiated separately.

Assessment of cash deposits as Business Income:

In cases where reply of the assessee is accepted that cash deposits constitute his/ her business receipts, addition is required to be made under normal provisions of the I-T Act.

In case the AO estimates income of the assessee by applying GP rate, books of account should first be rejected giving detailed reasons. In such cases, penalty is required to be levied u/s 270A from A.Y. 2017-18 onwards as follows:

Penalty u/s 270A is leviable for:

1 Under-reporting of income Penalty @ 50% of amount of tax payable on under-reported income
2 Under-reported income is in consequence of any misreporting there of Penalty @ 200% of amount of tax payable on under-reported income

Penalty u/s 270A may be initiated as follows:

1. Penalty proceedings u/s 270A of the Income-Tax Act are hereby initiated for under-reporting of income. The assessee has under reported income in view of clause__ to Section 270A(2) of the I.T.Act

2. Penalty proceedings u/s 270A of Income Tax Act are hereby initiated for under-reporting of income which is in consequence of misreporting thereof. The assessee has under misreported income in view of clause__ to Section 270A(9) of I.T.Act

In the printed notice u/s 274 read with section 270A, it is essential to tick the applicable part in printed penalty notice and strike off inapplicable part in printed penalty notice. Thus, if penalty is initiated only for under reporting of income, the printed notice must not contain mention of misreporting of income. In such a case, misreporting of income is required to be essentially struck off.

The assessment order should essentially contain following details:

1. Issue and service of notice u/s 142(1) for filing return of income

2. Issue and service of notices u/s 142(1) for furnishing details

3. Directions for charging tax u/s 115BBE, wherever applicable

4. Proper satisfaction for initiation of penalty u/s 271AAC or 270A

With regard to proper service of notices, Rule 127 of the Income-Tax Rules is reproduced below:

Service of notice, summons, requisition, order and other communication.

‘127.(1) For the purposes of sub-section (1) of section 282, the addresses (including the address for electronic mail or electronic mail message) to which a notice or summons or requisition or order or any other communication under the Act (hereafter in this rule referred to as “communication”) may be delivered or transmitted shall be as per sub-rule (2).

(2) The addresses referred to in sub-rule (1) shall be—

a. for communications delivered or transmitted in the manner provided in clause (a) or clause (b) of sub-section (1) of section 282—

(i) the address available in the PAN database of the addressee; or

(ii) the address available in the income-tax return to which the communication relates; or

(iii) the address available in the last income tax return furnished by the addressee; or

(iv) in the case of addressee being a company, address of registered office as available on the website of Ministry of Corporate Affairs.’

In SOP dated 05.03.2019, it is stated as follows:

‘2.3 It has been decided that in ‘best judgement assessment’ order being framed under this SOP, the Range Head shall mandatorily issue directions from time to time under section 144A of the Act. Further, Range Head would also monitor framing of the final assessment order.’

In this regard, Section 144A of the I.T.Act is reproduced below:

Power of Joint Commissioner to issue directions in certain cases.

144A. A Joint Commissioner may, on his own motion or on a reference being made to him by the [Assessing] Officer or on the application of an assessee, call for and examine the record of any proceeding in which an assessment is pending and, if he considers that, having regard to the nature of the case or the amount involved or for any other reason, it is necessary or expedient so to do, he may issue such directions as he thinks fit for the guidance of the [Assessing] Officer to enable him to complete the assessment and such directions shall be binding on the [Assessing] Officer:

Provided that no directions which are prejudicial to the assessee shall be issued before an opportunity is given to the assessee to be heard.

Explanation.—For the purposes of this [section] no direction as to the lines on which an investigation connected with the assessment should be made, shall be deemed to be a direction prejudicial to the assessee.

From perusal of above SOP & section 144A, it is evident that:

1. It is mandatory for Range Heads to give directions u/s 144A in ‘OCM’ cases.

2. The Range Head is required to give opportunity of hearing to the assessee where directions given are prejudicial to the assessee.

3. However, no opportunity of hearing to the assessee is required where directions are given as to the lines on which an investigation connected with the assessment should be made

4. Section 144A is not meant for giving approval

Protective or Substantive Assessment:

As far as possible, a protective assessment should not be made before substantive assessment.

Source- Taxaloguue – Volume 1- Issue 2- OCT-Dec 2019 Issued by Directorate of Legal & Research -Central Board of Direct Taxes

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